I would take a look at historic norms. For instance, the S & P 500 has had an average P/E of about 16.5 during the 20 Century. When stocks went above that, or say 2 percentages points above the norm. I would put my monthly amount into bonds, money markets, REITs and other types of assets. Staying away from stocks, because they were too high. When the US stock market was below the 16.5 norm, I would invest all in US stocks. I would also consider a small part of my portfolio, for more risky investments, like gold stocks and emerging markets. I would use historic norms, for international investing as well. Currently the British Pound is only worth a $1.53. $2 to $2.5 is more like the norm. So, buying British stocks would be a good idea, using this concept, of investing based on historic norms.

I did go to business school, where I was taught the efficient portfolio hypothesis. I don't think that model was worth very much. It was very sophisticated, supposedly to help you get the most return for the risk available. Major companies offering self directed accounts, did use this, or at least a very similar concept. Mar 2, 2009, when the board market hit a very long term low. That would have been a great buying time. But, how could people be patient enough to wait for that? How would you know at the time, that was the low. It was a great opportunity, but how could people have taken advantage of it?

I don't see any other way, to invest and save for retirement, than by using some sort of asset allocation. As I remember, there were people saying in 1999, that the market was getting a little too high. But, it was March 2001, before the market head down. Making timing the market very difficult. Maybe there is a better way than usinghistoric norms, but I don't know what it would be.

You're fooling yourself into thinking that you can time the market based on what has already happened. If it were that easy, everyone would already do it. What history really shows is that it's more than "difficult", it's nearly impossible to out-guess the markets. Sure, if you went back in time you'd do great.

Those who stuck with their allocation can continued to invest new money to plan came through that period in fine fashion.

Certainly methods like this have been back-tested. If it paid off, I would think a strategy such as this would be widely touted.

Another thought. Doesn't regular investing a certain percentage of wages over time according to a set asset allocation, which is how the vast majority save for retirement, accomplish what you propose? Say stocks are "low" compared to your benchmark. Your investment allocation is to put $0.60 of each dollar into a broad market stock fund like VTSMX. You are buying more shares of stocks for your dollar because the price is low. Say stocks are "high" and now you are buying fewer stocks for your dollar. Furthermore, doesn't rebalancing also move assets from the high to the low?

I used Robert Shiller's spreadsheet which he provides on his website for his CAPE data in the book Irrational Exuberance. But I downloaded it a while ago, so it only had complete data up to 2011.

Lets say you retired in 2011 (because that is where my data ends) and you invested from age 21 to 66; 1966 to 2011. When you start investing in January 1966, the average P/E ratio form 1871 to 1966 is 13.8. So you would have used 13.8 and not 16.5 as your P/E ratio. The idea is when the monthly P/E ratio is below the average you add money to stocks, this works out to only putting money into stocks for 166 of the 540 months you are saving; if you update the average P/E ratio every month, this only increases the number of months to 168 (the average P/E increases to 15.4 by 2011).

Here are the dates you would have added to stocks, if you stick to the 13.8 P/E ratio:May and June 1970Aug and Sep 1973Nov 1973 to Nov 1985Dec 1987April 1988 to July 1989

I don't know what sort of returns this idea would end up with, but I think it would be difficult to stick to.

Before the efficient portfolio hypothesis concept, many people would put half in bonds & the other half in stocks. International investing with mutual funds was unknown or little known. So, there were only two choices. I don't know who came up with the efficient portfolio hypothesis, or when the concept became accepted. At one time, there were few no load mutual funds. Funds were 8.5% loaded and bought from a broker, who may or may not have been any good. There were no IRA, 401k or 403b accounts. There really was no good way to save for retirement. I don't read all the literature, from the many people who talk like they understand it all. I have never heard of rebalancing based on historic norm. Just rebalancing to keep the same asset allocation. I know Fi (Fidelity) never says the market is too high. The mgr at Fidelity 50 fund, left Fi after a dispute about his fund not being fully invested. Even though the fund had fund had done very well. So, Fi has never suggested rebalancing based on stocks being too high.

While, it's true any concept that works well, will be quickly exploited. In this suggestion, I'm just saying put money in stocks when they are low relative to their historic norm.It would help return and clearly lower risk. There's a herd mentality along with every bull market. The investor would leave the herd, when the S & P's P/E get over 18.5, or there about (some might use a higher figure). A number takes the emotions out of the investors thinking. International investing has not done all that well, because of Japan. When I was in business school. The yield on the S & P 500 was about 3.5%. Japan's yield was less than 1/2 of 1%. As I remember, Japan's Nikki Dow went down to .12%, just before their bubble burst.

I used Robert Shiller's spreadsheet which he provides on his website for his CAPE data in the book Irrational Exuberance. But I downloaded it a while ago, so it only had complete data up to 2011.

Lets say you retired in 2011 (because that is where my data ends) and you invested from age 21 to 66; 1966 to 2011. When you start investing in January 1966, the average P/E ratio form 1871 to 1966 is 13.8. So you would have used 13.8 and not 16.5 as your P/E ratio. The idea is when the monthly P/E ratio is below the average you add money to stocks, this works out to only putting money into stocks for 166 of the 540 months you are saving; if you update the average P/E ratio every month, this only increases the number of months to 168 (the average P/E increases to 15.4 by 2011).

I was taught 16.5 to 17 as a P/E, with a couple of points higher not being anything to worry about. But, in the late 1990s, the P/E on the S & P 500 got to 28. At 13.8, youwould very seldom put any money in stocks. I don't know where the P/E I was taught came from. However, it was very well accepted. 13.8 seems very low to me.

I have heard the 16.5 number also and was surprised by what the data showed, now I think I see what our mistake was. If you look here, http://www.multpl.com/ you can see the historical average P/E ratio is now 15.49. BUT if you go here,http://www.multpl.com/shiller-pe/ you can see the historical average Cyclically Adjusted PE Ratio (a.k.a. CAPE or Shiller P/E or P/E 10) is 16.47. So perhaps you mean the CAPE and not P/E.

I went back to the same data and here is the info with CAPE as opposed to P/E ratio:Average CAPE 1966: 14.87Average CAPE 2011: 16.39Number of months between 1966 and 2011 where current CAPE is less than average historical CAPE: 181 of 540Number of months between 1966 and 2011 where current CAPE is less than average historical CAPE plus 2*: 229 of 540*because you mentioned this